The paragraph introduces the Norfolk Southern Corporation's Third Quarter 2023 Earnings Call and outlines the structure of the call. It also mentions the company's forward-looking statements and potential risks and uncertainties. The company's President and CEO, Alan Shaw, thanks his colleagues for their work and discusses the company's focus on resilience and operational excellence.

The company experienced two technology outages in the third quarter, but they were not related to cybersecurity. The company is taking measures to prevent future outages and has launched a review of their technology infrastructure. They have also continued to focus on their strategy of operational excellence and making smart investments. The low macroeconomic environment has affected their operating ratio, but they are confident in their approach and believe they will be well-positioned for growth when the market recovers.

Despite short-term impacts on our operating ratio, our focus on productivity and continuous improvement will help us achieve and maintain industry competitive margins in the long term. We are making progress on our strategy, with improved service, volume, and safety. Our marketing team is also finding innovative solutions to add value to our service. We are also fulfilling our commitments to the community of East Palestine.

Mark George gives an update on the Eastern Ohio derailment, stating that soil removal will be completed soon but ongoing testing will continue until April 2024. $118 million was accrued in Q3 for the extended timeline, and another $70 million was recorded for legal and other costs. A claim for reimbursement was filed with insurers and $25 million was received, but the process is expected to be lengthy due to multiple parties sharing exposure. Only half of the $966 million expense has been paid, and the remaining $450 million is expected to be spent in the fourth quarter and 2024. There may be additional costs in the future, such as settlements, fines, and legal fees, but the exact amounts are unknown.

In this paragraph, the speaker discusses the impact of third quarter costs on the company's results. They highlight the GAAP results and then focus on the adjusted results, which show a decline in revenues and operating income compared to the previous year. The largest driver of this decline is the reduction in fuel surcharge revenue, while expenses were down slightly due to lower fuel prices. They also mention the effect of a state income tax change from the previous year.

In the third quarter, the company's compensation and benefits expenses decreased by $20 million due to higher pay rates and employee levels, offset by a favorable comparison to the previous year's charge. Depreciation expenses were in line with expectations, while purchase services and materials costs increased. The delay in cost savings related to past service issues is expected to accelerate in the fourth quarter, but there will also be additional costs related to building resiliency and investing in hiring and workforce improvements. Other income increased by $42 million due to favorable returns from company-owned life insurance, and the adjusted effective tax rate was in line with expectations.

In this paragraph, the speaker discusses the company's free cash flow and shareholder distribution, mentioning a decrease in free cash flow due to derailment-related expenses and lower core operating results. They also mention reserving capital for a potential transaction and hand off to another speaker for an update on the company's safety efforts. The speaker notes that while there has been improvement in safety measures, there is still room for improvement and the company remains focused on reducing accidents and improving outcomes.

The company has made progress in improving service and train speeds have resumed their upward trend. They have also reduced dwell time and improved schedule rigor in terminals, leading to the highest weekly car loadings since Q2 2022. The company plans to continue minimizing car dwell and maximizing velocity across the railroad to sustain safe, reliable, and resilient service and drive productivity. They are focused on improving locomotive velocity and productivity by implementing terminal discipline initiatives and increasing network velocity. They also have a qualified workforce and are on track to have their conductor training pipeline below 600 by yearend. The company is driving service improvement aligned with their scheduled railroad model, which will result in additional gains in resilience, productivity, and growth. This includes disciplined terminal execution.

Norfolk Southern is strictly adhering to their operating plan to ensure trains arrive on time and minimize dwell time. They are also investing in their workforce by providing training for conductors to become locomotive engineers and cross-training employees at key terminals to increase their flexibility and efficiency. This will allow for greater consistency in terminals and provide employees with more work opportunities.

In the third quarter, Norfolk Southern reported a 2% decrease in volume and an 11% decrease in revenue compared to the previous year. The decline in revenue was greater than the decline in volume due to lower fuel surcharge and intermediate storage revenue. Weakness in energy markets was the main factor in a 3% decrease in merchandise volume. The decline in crude oil shipments was due to unfavorable fuel prices and low natural gas prices affected shipments of sand and NGLs.

The article discusses the performance of the company in various markets, including energy, automotive, and intermodal. While energy markets experienced declines, the automotive sector saw a 7% increase in volume. Intermodal volume was down slightly, with declines in domestic but growth in international. Intermodal revenue was down 22%, mainly due to lower storage fees and competitive pressure. Within the international business, there were negative mix effects from shippers returning to lower yielding lanes and an increase in lower yielding empty shipments. Coal volume also dropped due to weak conditions in utility markets.

In the fourth quarter, utility coal volume decreased by 26% due to high stockpiles and low natural gas prices, while export volume increased due to strong Asian demand. Coal revenue declined by 8% due to lower volume, but revenue per unit set a new record. Slow volume recovery is expected in uncertain economic conditions, but there is potential for growth in the automotive and metals markets. However, sustained soft conditions in energy markets may offset this growth. The ongoing UAW strike is also a downside risk to overall merchandise volumes.

The company's marketing and operations teams are working together to address challenges for customers and drive business growth. Intermodal volume is expected to improve due to improved service and market conditions, but the peak season is still relatively muted. Coal volumes should remain stable with potential for growth in export markets. The company is also experimenting with new services for intermodal customers. Despite economic uncertainty, the company is confident in its ability to collaborate with customers and provide value for future growth.

In the third quarter, Norfolk Southern introduced new service offerings aimed at making them the preferred option for freight transportation and driving modal conversion. These include partnerships with CN and Florida East Coast Railway, an investment in DrayNow for intermodal technology, and successful industrial development efforts. These projects will bring in over 7,800 new car loads annually. Collaboration between marketing and operations was crucial in bringing these projects to life.

The speaker discusses the company's aggressive pursuit of project-oriented growth in a challenging freight environment. They are actively making improvements to their service portfolio to become a preferred service provider and drive sustainable growth. The 2023 revenue is expected to be down by 4% due to lower Q3 revenue, but the company is confident in their strategy and optimistic about the future. The call is then opened for questions. One question asks about the temporary service costs and resiliency investments, and the speaker explains that they are making investments to improve productivity and drive OR improvement in the fourth quarter and beyond.

The speaker is discussing the costs associated with their company's operations and how they will be affected in the upcoming year. They mention a slight reduction in service costs in the third quarter, which they expect to continue in the fourth quarter. However, there are also structural cost increases related to developing resiliency and improving the quality of life for their workforce. These costs will likely be spread across various categories and will continue to increase in the fourth quarter, but should moderate in 2024. More guidance on 2024 will be provided in January.

In this paragraph, Alan Shaw, Mark George, and Chris Wetherbee discuss the company's investments in resiliency and how they will lead to the elimination of service recovery costs and growth in industry competitive margins. They also mention the potential for improved operating ratio in the fourth quarter and address concerns about the company's cost structure compared to competitors.

The speaker addresses a question about the company's commitment to industry competitive margins and long-term growth. They emphasize that returns follow investment and that they are not chasing short-term targets. They also mention that they are not satisfied with their current cost structure and are working to improve it. Another speaker then talks about coal yields and how they are not expecting the current trend to continue. The company is forecasting prices to remain steady due to strong demand from India and China. Finally, a question is asked about new lanes and the speaker commends the company's progress in this area.

The CEO of Norfolk Southern discusses the changes and improvements made within the company, including bringing in new talent and implementing a new strategy. He also addresses the resiliency costs, which involve predictable work schedules, wage increases, and investing in additional resources. These efforts have resulted in improved service, safety, and volume growth for the company. The CEO believes that these changes will drive long-term shareholder value for Norfolk Southern.

In the third quarter, about a third of the resiliency expenses were related to paid sick leave, while the rest was for headcount additions and locomotive investments. The speaker was asked about the company's commitment to achieving industry competitive margins in the long term, and he stated that the company is committed to it and expects to see sequential margin improvement in the fourth quarter.

The company is committed to improving its services in the long term, which will help reduce service recovery costs and increase productivity. This will also lead to higher volumes and prices, ultimately improving margins. However, the company also needs to focus on driving revenue growth, particularly in the intermodal sector where revenue per car was weak. This could be achieved through a mix of factors such as improving the service product, tightening truckload market, and increasing truck rates. Overall, the company is taking a balanced approach to improve its performance in 2024.

The improved service product of the company will attract more volume and allow for pricing based on the product's value. The market is currently experiencing a decline in intermodal storage revenue, which accounts for the majority of the decrease in revenue per unit. This is due to a mix of factors, including a shift to international shipments and higher growth in short haul lanes, which have lower yields. The truck market remains loose.

The cash rate index has been down for 21 straight months and contract rates on the highway peaked in March of last year. However, the market is expected to rotate back to growth and Norfolk Southern is well positioned to take advantage of this. The speaker also addresses two questions about the company's performance, confirming that the $650 million headwind for coal and accessorials is still on track and discussing the disconnect between core pricing and inflation. The known headwinds are still intact, but storage revenue has normalized and fuel prices are a factor to consider.

The company expects to see a headwind in storage until the second quarter of next year, but coal pricing has been a positive surprise. The company's strategy is to offer competitive prices based on long-term contracts, which has resulted in above-rail inflation pricing for many quarters. The company is confident that this strategy will continue in the future. The operational disruptions in East Palestine have resulted in $175-200 million of lost revenue, but as service improves, the company expects to see an increase in freight. The recent tech outages have also had an impact, but it is not quantified.

The company is seeing a return to 2Q '22 levels of volume, but there are still some concerns in certain freight categories. However, if these concerns are resolved and there is a macroeconomic boost, the company could potentially see even higher levels of volume due to their strong service performance. The company is pleased to see a peak season this year and is confident in their ability to handle it.

The speaker discusses the potential for increased freight volume in their network, citing economic and geopolitical uncertainty as potential challenges. They also mention the quality of their customers and their ability to offer value, particularly in the Intermodal market. The speaker is confident in their ability to recapture market share and generate more revenue.

Alan Shaw discusses the efforts to standardize operating practices across the network in order to improve productivity, capacity, and service. This is part of the PSR principles and has been an ongoing effort led by Paul and his team. The recent improvements in Velocity and Dwell can be attributed to the combination of better operations, changes made, and the addition of headcount. Mark also mentions the investments in resources such as T and E employees, cross-training conductors, and locomotives to further improve fluidity and availability.

The company is seeing positive results from refreshing their operating leadership, resourcing up, and enforcing a high degree of compliance to the plan in order to run a scheduled railroad. They expect to see further improvement in dwell and train speed, and plan to focus on running reliable service and adding productivity initiatives in 2024. The conductor training pipeline is expected to taper down in the fourth quarter, and the company will need to hire more supervisors to support the increase in T&E staff.

The company's T&E is reaching its peak and they are prepared to handle more volume and increase productivity. The UAW strike is causing a backlog of finished vehicles, but the company is unable to provide specific numbers. On the industrial development side, the company has over 600 projects in the pipeline and has seen significant investment in the southeast and Midwest regions.

During a recent call, Ed Elkins, CEO of a transportation company, mentioned that they had three new lumber shippers in September, highlighting the strength of the non-residential or manufacturing construction economy. This sector is currently stronger than it was in the 2000s and is mainly focused in the Midwest and Southeast regions. The company is well positioned for the potential "manufacturing super cycle" in the coming decade. They also mentioned that there have been over $70 billion invested in the EV supply chain, with 30% of that on their lines. The U.S. is becoming a more attractive place for investment due to various factors such as infrastructure and energy policies. During a Q&A session, they were asked about customer preferences for short-haul moves and empty moves. They stated that this trend may be cyclical, but could also be structural due to changes in supply chains. However, they are confident that when the up cycle comes, shippers will still choose rail moves over truck moves.

The speaker discusses the impact of the pandemic on international shipping lanes and how they have since rebounded due to the company's strong portfolio of intermodal services and their ability to add value in the market. They also mention their confidence in their franchise in the Eastern region of the US. The speaker then addresses a question about the timeline and impact of ongoing spending and potential cash flow shifts related to a recent incident.

The speaker is pleased that the site remediation work is winding down, but acknowledges that there may be additional costs and complications in the future, particularly with regards to litigation and insurance. They have received their first cash recovery from insurance, but it is unlikely to be significant in the near term. The speaker also mentions that there may be significant premium increases for insurance going forward. A question is then asked about customer developments and the speaker notes that while some customers are moving forward, there are still some uncertainties.

During a conference call, Alan Shaw, the CEO of a company, was asked about any shifts in their projects due to higher interest rates or market uncertainty. He responded by saying that there has been an acceleration in manufacturing projects, but a slowdown in warehousing projects due to pressure from interest rates. He also mentioned that there is a lot of demand for materials in building sites and that the US, particularly the eastern and southeastern regions, are attractive for energy-intensive industries. The final question was from David Vernon, who asked about the company's expected average incrementals when volumes turn. Mark, the speaker, responded by mentioning the structural higher costs and mixed headwinds that could affect their performance. This includes short-haul intermodal, bringing back international entities, and seasoning new intermodal services.

The speaker, Alan Shaw, is responding to a question about the company's average incremental margins. He explains that the company has faced challenges in the past few quarters due to mixed environment and temporary costs related to service, but these should be offset by structural headwinds and a lack of fuel headwinds in the fourth quarter. He also mentions a recent uptick in volume and expects normal incrementals to apply in the future. He thanks the participants for their questions and concludes the call.

This summary was generated with AI and may contain some inaccuracies.